Amount Overdrawn: ₹ 50000

Number of days: 24 Days

Rate of Interest: 24%

Loan Period: 15

Overdraft Interest per day: ₹ 33

What is overdraft?

In simple terms, overdraft is a financial facility offered by banks to help account holders withdraw money from their savings and current account, even if the account balance is below the minimum required balance or zero. This limit is assigned to each customer depending on his credit score, repayment history, account value and others. This facility is well known as short-term cash loan facility that the customer can utilize at any point in time upto the assigned credit limit. However, this facility can be availed by paying the interest on the utilized credit amount.

How is overdraft interest calculated?

The interest of overdraft is calculated on the basis of the amount you withdraw. For instance, if you hold Rs. 50,000 in your overdraft account and withdraw Rs. 10,000, then the interest will be calculated on the amount withdrawn.

In this case, consider the rate of interest as 10% pa.

Overdraft account eligibility

Different types of bank accounts have diverse eligibility criteria for availing this facility.

Overdraft against salary: Salary account holders are eligible to opt for this facility. This is possible only when the account holder’s salary is credited each month in the said bank account and also the company’s name is registered in the bank’s account list. For salary account holders, overdraft limit is set up to 3 times of the salary limit. Each bank has a minimum specified salary limit ranging from Rs. 15,000- Rs. 25,000. This facility can be availed on submitting minimum documents without any security or collateral.

Overdraft on savings account:Overdraft on salary account is relatively a new concept in India; it is backed by the government and all the accounts opened under Pradhan Mantri Jan Dhan Yojna are eligible for overdraft of Rs. 5,000 or 4 times more than the monthly minimum balance maintained. The account has to be linked to Aadhar and should be operated for at least 6 months.

The account holders should also hold another savings account and pay the renewal fee associated with it. However, the interest charged on overdraft is not more than 2%.

Popular overdraft account offered by banks in India are SBI Loan Against Time Deposit and Citibank Suvidha Savings Account.

Benefits of Bank overdraft

Gives you instant access to money:Customers can withdraw money at any point in time (though upto the specified limit) without having to wait for a day or two

Low interest rate:Interest is calculated only on the basis of the amount withdrawn. This benefit helps you save money as interest is generally lower than that of a personal loan.

Disadvantages of bank overdraft

Reduction in limit:Owing to the company’s poor financial performance, banks can lower the overdraft limit assigned.

Risk:The overdraft facility can stay protected against life insurance policies, shares, etc. This means if you fail to repay the bank, then these assets are at a risk of getting seized.